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Supreme Court Rejects Maryland Power Plant Subsidies, But Signals Permissible Ways for States to Incentivize New Plants

In recent years, Maryland attempted to subsidize new power plants by guaranteeing prices for generating capacity at wholesale auctions administered by PJM Interconnection L.L.C. (PJM). Tuesday, the Supreme Court unanimously affirmed in Hughes v. Talen Energy Marketing, LLC1 a decision of the U.S. Court of Appeals for the Fourth Circuit, holding that the Maryland subsidy unlawfully infringed on the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC) to establish rates with respect to wholesale sales of electricity.

Summary of the Case

FERC regulates PJM’s capacity auctions to ensure the auction clearing prices are “just and reasonable,” and had rejected a Maryland proposal that new generators, under certain circumstances, be guaranteed a stable capacity price for their first ten years in the market. The Court held that when the Maryland Public Service Commission subsequently adopted a subsidy, through a state-mandated contract, to a new generator conditioned on the generator selling capacity into PJM’s auction, it impermissibly interfered with FERC’s exclusive jurisdiction over wholesale rates by guaranteeing a different wholesale price for capacity sold at auction by the new plants. However, even as the Court held the subsidy invalid, it suggested other permissible means by which a state may be able to achieve the same end.

Under a FERC-approved market structure, PJM forecasts the future loads of load serving entities (LSEs, typically traditional utilities) and requires them to buy equivalent future capacity. LSEs may secure that capacity through either bilateral contracts or periodic capacity auctions administered by PJM. Owners of generating capacity, including developers of generation plants that will be placed in service in time to provide the committed capacity, bid into these “forward” capacity auctions by offering to supply a certain amount of electricity at a certain time in the future for a certain price. PJM accepts bids, starting with the lowest-cost bids, until all forecasted demand is met, and then awards all accepted bidders the price of the highest accepted bid, i.e., the “clearing price.”

Maryland adopted the subsidy at issue to incentivize new development of in-state power plants because grid congestion caused high prices for imported power.2 Under the subsidy program, the generation developer was given long-term price guarantees for capacity sold into the PJM capacity auctions, regardless of the auction clearing price.3

Upholding the Fourth Circuit, the Court reasoned that this arrangement intruded on FERC’s authority by undermining the PJM capacity auction. FERC had approved the auction as “the sole ratesetting mechanism for sales of capacity to PJM.” The Federal Power Act (FPA) gives FERC “exclusive jurisdiction over ‘rates and charges . . . received . . . for or in connection with’” interstate wholesale sales. (Quoting FPA, 16 U.S.C. § 824d(a)). Because the subsidized plants were participating in the PJM auction but were guaranteed a rate other than the clearing price, the subsidy effectively adjusted an interstate wholesale rate, thereby “invad[ing] on FERC’s regulatory turf.” The Court held that under the Supremacy Clause of the U.S. Constitution, the FPA preempts such adjustment by the states.

On one hand, Hughes continues the trend of January’s decision upholding broad FERC jurisdiction in FERC v. Electric Power Supply Ass’n (EPSA). EPSA upheld FERC’s authority to require wholesale electric market operators to compensate demand response by large customers at the full market clearing price for power in auctions for short-term supply. (Read our summary of EPSA.) EPSA evaluated action by FERC, not the states, and yielded a broad endorsement of the federal agency’s power, regardless of incidental effects on retail rates governed by the states.

Future Implications

On the other hand, Hughes represents a much narrower affirmation of FERC’s jurisdiction than EPSA. In Hughes, the Court considered not a FERC regulation, but a state action that affected the functioning of FERC-regulated markets. The Court struck down the state action, but drew its analysis narrowly, writing, “Our holding is limited: We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC.”

The opinion seems sympathetic to the state’s goal of encouraging new construction of in-state generation in response to grid congestion. While not addressing the permissibility of other state measures to achieve that end, the Court seemed to go out of its way to list such options: “tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.” And in case the point might somehow be missed, the Court closed with this reassurance:

Nothing in this opinion should be read to foreclose Maryland and other States from encouraging production of new or clean generation through measures “untethered to a generator’s wholesale market participation.” So long as a State does not condition payment of funds on capacity clearing the auction, the State’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable.

So in a narrow sense Hughes defends FERC’s jurisdiction from state intrusion. But the Court left the door open for states to craft other generation subsidies that could withstand judicial challenge by avoiding a direct impact on a FERC-imposed wholesale rate.

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